“There are not a lot of investors that are so deeply dedicated to promoting women founders, and I feel very lucky to work at Rothenberg Ventures where Mike Rothenberg cares very deeply about this.”

Fran Hauser, a Limited Partner from New York, highlights Rothenberg’s commitment to bridging the gender gap typically seen in Silicon Valley, “When you look at our portfolio, 20% of our portfolio companies are female founded, which is much higher than the industry average of 11%.”

Kegan Schouwenburg, founder of Sols expresses her appreciation for Mike’s approach to diversity and innovation, “Rothenberg is revolutionizing venture capital.”

Mike’s commitment to diversity extends beyond gender. He was recognized by CBS in a story for hosting a high school workshop to bring underserved communities, who typically do not get exposure to cutting edge technology, to experience some frontier technologies. The students were able to discuss frontier technologies, like virtual reality, with the engineers and executives from tech firms.

In a push to bridge the diversity gap in Silicon Valley, Rothenberg hosts a workshop to expose underserved communities to frontier technologies like virtual and augmented reality. “They are determined to address Silicon Valley’s blindspot for women and people of color.”

Jimmy Ku, of River Ecosystems spoke about the benefit of embracing diversity in tech, “Being able to get different people with different experiences allows you to have a diversity of ideas, and you can build better products that way.”

Unlike many in Tech who only talk about diversity, Rothenberg has proven his commitment to diversity where it matters. Fran Hauser, a Limited Partner from New York, highlights Rothenberg’s commitment to bridging the gender gap typically seen in Silicon Valley, “When you look at our portfolio, 20% of our portfolio companies are female founded, which is much higher than the industry average of 11%.”

The troubles at Rothenberg Ventures seem to have begun with the issuance of a line of credit by Silicon Valley Bank (SVB) to Rothenberg Ventures, which was procured with the aid of various Rothenberg Ventures senior executives and council. As collateral for the loan, the Rothenberg Ventures team, including Lynne McMilan (Finance Director) and Geoff Rapaport (General Council), informed SVB that the 2015 Fund would provide the collateral in an account that would need to be in the name of the 2015 Fund. The amount represented prepaid management fees which not only did each LP of the 2015 Fund provide explicit permission to Rothenberg Ventures to pay the lifetime management fees of the fund at any time, but the 2015 Fund LPs also actually funded these fees as well.

Notwithstanding the explicit permission Rothenberg Ventures had to take these prepaid fees at any time, Mike Rothenberg took the more conservative approach to provide optionality to the 2015 Fund by instead invoking another explicitly approved option the LPs empowered him as Manager with, which was his decision to encumber assets of the 2015 fund per its disclosure to investors.

Initially, SVB complied with this requirement, demonstrating that not only did they understand the intended transaction but also how it was intended to be structured. After initially correctly opening an escrow account with permission from Rothenberg Ventures, SVB executives Jim Gardner and Frank Amoroso later insisted on creating a new collateral account, citing nomenclature issues. However, without requesting or receiving permission from anyone at Rothenberg Ventures, SVB took the liberty of creating a new, unauthorized account in the name of Rothenberg Ventures, fraudulently structured transactions in a different manner than had been agreed upon, and placed collateral funds in that new, unauthorized account. Repeatedly, during and after the transactions, SVB continued to make representations to Mike Rothenberg and Rothenberg Ventures to conceal what they had done.

For example, SVB confirmed in an email that the escrow account was “ending in 8782”, which was misleading because although the original intended account set up for the escrow account for the 2015 fund did end in those digits, in reality not only had SVB opened a new and unauthorized account to move the escrow collateral into, but SVB also fraudulently, inexplicably, and without permission wired $4.25m from the account ending in 8782 to the Rothenberg Ventures Management Co, and simultaneously also fraudulently and without permission wiring $4.25m from the Rothenberg Ventures Management co account to the new account they had created.

SVB’s apparent intention and result was to transfer $4.25m to this new account – via the Rothenberg Ventures Management Co – on the same day and at the same time so that it would not affect Rothenberg Ventures Management Co’s daily balance and therefore not be immediately noticed. The result was creating the false appearance that Rothenberg Ventures Management Co had taken the $4.25m from the 2015 Fund on that day, when in fact Mike Rothenberg had given no such instructions or approvals to do so. The SEC imagined that this taking of fees was at Mike Rothenberg’s direction (yet even that scenario would have been approved by LPs).

Subsequent to this secret movement of funds out of a 2015 Fund account, Finance Director Lynn McMillan noticed the irregularity in the bank statements which gave the appearance of misappropriation. McMillan then created and evangelized a spreadsheet to show the transfer, assumed to have been made by Mr. Rothenberg. By July 2016, Rothenberg Ventures senior officers had turned against Mr. Rothenberg and were carrying out a secret mutiny that culminated in false accusations against Mr. Rothenberg, resignations from their respective positions, ceasing communications with Mr. Rothenberg, and at least one Rothenberg Ventures employee claiming whistleblower protection with the SEC.

Rothenberg Ventures went from a vibrant early-stage investment firm with access to the best deals in Silicon Valley to being shunned by the industry and losing valuable opportunities on the brink of closing in a matter of just a few weeks by the fraud of a “dirty bank”, to quote the prominent former DOJ attorney. SVB’s fraud sowed the seed s of mistrust and panic among the ranks of the firm and ultimately snowball into a misguided regulatory inquiry of an exempt investment advisor that would inevitably result in the SEC claiming at least some sort of technical infraction in order to procure or force a settlement. Neither the SEC nor anyone else has ever claimed that Mr. Rothenberg’s investors’ current holdings in the Funds are any less valuable today than their initial investments. In fact, no one has ever even disputed Mr. Rothenberg’s assertions that his investors’ holdings have significantly appreciated in value relative to their initial investments, even net of the significant expenses and opportunity costs incurred following the actions of the SVB and SEC.

What did they get wrong with their motion seeking disgorgement? It would seem pretty much everything.

The Motion claims that fees and expenses were taken outside of the parameters of the fund agreements, but actually reading the contract language tells a different story. The funds’ governing documents allow for indirect investments, charging for indemnity, and incurring other expenditures. And more importantly, “The river branded businesses served the interests of the funds and their expenditures did not constitute personal profit to Mr. Rothenberg.”

Mistakes made by Silicon Valley Bank have lead to faulty conclusions and are the subject of a separate suit. Transfers made without direction or consent of Mike Rothenberg set off a chain reaction that has is still unfolding.

For more detail on just how much the SEC got wrong with this motion, see below:

It would appear that there is more to this story than meets the eye. Did those accusing Rothenberg Ventures of misappropriation have something to cover up?
According to a suit filed last week, David Haase, former CFO of Rothenberg Ventures, is alleged to have embezzled funds from the company.

The suit states that a group of employees of Rothenberg ventures plotted to take Rothenberg’s “clients, customers, confidential information and trade secrets and start a new company…”. It states that employees conspired to move employees, investors, and investment information to a competing company called Arcturus, and spread rumors about Rothenberg Venture finances to get employees to quit and join Arcturus, later bought by DMG.

One employee was found to have hacked into the company’s computers to private information over to the competing firm. The rumors snowballed out of control, spreading uncertainty and doubt about the company, and leading many employees to quit and/or raid the company’s database.

This suit shows another side of the story not yet told. You can read the entire suit below:

There is no shortage of venture capitalists in Silicon Valley and San Francisco, its northern annex. Still, Rothenberg attracted attention because of his relative youth, starting the firm at age 28.

“People called us the millennial venture firm,” said Rothenberg, who holds bachelor’s and master’s degrees from Stanford University and launched his fund while getting an MBA from Harvard. “I picked venture capital to be my startup.”

His approach involved smaller investments, usually between $100,000 and $250,000. Unlike other VCs, he didn’t try to micromanage startups by securing board seats. The firm focused on networking events where startups and investors could meet.

Other investments include Patreon, which lets people pay creators for their work; Boosted, an electric skateboard maker; Andela, which seeks to cultivate African programming talent; and Planet Labs, a satellite photography company.

The pinnacle of Rothenberg’s networking-centric style is Founder Field Day, where startup founders and investors schmooze at AT&T Park, the homefield of baseball’s San Francisco Giants. It’s been held every year from 2014 to 2017.

Rothenberg was also enthusiastic about the prospects for virtual reality, putting together an effort called River to produce VR content and invest in very young VR startups.
(Source: CNET Article by STEPHEN SHANKLAND)

Mike Rothenberg’s story has all the elements of a Silicon Valley drama: A wunderkind shakes up the venture capitalist business with explosive and splashy success, only to see his firm all but collapse amid accusations of mishandled funds and lavish spending.

Now, Rothenberg, 34, is seeking redemption in a new chapter, filing a lawsuit on Monday that blames a single bank for struggles two years ago that cost his business more than $100 million in investment gains and marred his reputation.

The lawsuit alleges Silicon Valley Bank violated Rothenberg’s specific instructions, transferring $4.25 million to a wrongly established bank account and creating the appearance he had misappropriated investors’ money. That allegedly caused employees to flee Rothenberg Ventures Management Company and torpedoed plans for a 2016 round of investments.

The lawsuit, filed in California Superior Court, accuses Silicon Valley Bank of negligence, deceit, fraud and unfair business practices. The suit, which seeks a jury trial, alleges the bank was eager to please Rothenberg in hopes of securing his company’s business and took shortcuts to do so. See below for the complaint in full.

“The bank created the false appearance that the management company and Mr. Rothenberg had wrongfully misappropriated millions in investor funds,” says the suit, which seeks damages to compensate for tens of million of dollars in lost investment. “Having been effectively branded as an embezzler by the bank’s unauthorized transfer, the management company collapsed, costing fund investors tens of millions in would-be investment gains and destroying Mr. Rothenberg’s career.”

Silicon Valley Bank said Tuesday it’ll fight the case. “We strongly disagree with the allegations made in the lawsuit,” the bank said. “We intend to defend the lawsuit vigorously, and we will further seek any remedies as appropriate.”

SVB, founded in 1983 and headquartered in Santa Clara, California, specializes in the high-tech clients and reported $56 billion in assets for its most recent quarter.

Whether the legal action will restore Rothenberg’s standing in the venture capital community is an open question. On the same day the suit was filed, the Securities and Exchange Commission said Rothenberg had agreed to barred from the brokerage and investment advisory industry for five years for misappropriating funds and misrepresenting their use to investors. Rothenberg, whose firm faces fines for what the SEC called a “fraudulent scheme,” didn’t admit or deny the SEC’s allegations.

Still, Rothenberg’s lawsuit against SVB is a potent reminder that reputation and money go hand-in-hand in Silicon Valley. Reputation helps VCs lure limited partners, the people who supply the investment capital. It also makes VCs attractive as investors in start-ups.

“We’d like to bridge the information gap between what people believed to be true and what actually happened,” Rothenberg said in an interview. “We would like Silicon Valley Bank to come clean about their actions and stop doubling down on trying to pretend it didn’t.”

A high-flyer laid low
There is no shortage of venture capitalists in Silicon Valley and San Francisco, its northern annex. Still, Rothenberg attracted attention because of his relative youth, starting the firm at age 28.

“People called us the millennial venture firm,” said Rothenberg, who holds bachelor’s and master’s degrees from Stanford University and launched his fund while getting an MBA from Harvard. “I picked venture capital to be my startup.”

His approach involved smaller investments, usually between $100,000 and $250,000. Unlike other VCs, he didn’t try to micromanage startups by securing board seats. The firm focused on networking events where startups and investors could meet.

Other investments include Patreon, which lets people pay creators for their work; Boosted, an electric skateboard maker; Andela, which seeks to cultivate African programming talent; and Planet Labs, a satellite photography company.

The pinnacle of Rothenberg’s networking-centric style is Founder Field Day, where startup founders and investors schmooze at AT&T Park, the homefield of baseball’s San Francisco Giants. It’s been held every year from 2014 to 2017.

Rothenberg was also enthusiastic about the prospects for virtual reality, putting together an effort called River to produce VR content and invest in very young VR startups.

His fixation on the brand got him in trouble with the SEC, which said in its complaint that Rothenberg leased a suite at Super Bowl 50, financed a race car team and threw private parties at resorts to raise its profile. “Rothenberg commingled and funneled cash through a network of bank accounts and entities to pay these expenses, with most of the cash coming from the Rothenberg Funds, much of which defendants had misappropriated under the guise of management fees, administrative expenses, advances, and so-called ‘carry fees’ purportedly due to RVMC,” the SEC alleged.

Bad press
All appeared fine until late December 2015, when SVB transferred $4.25 million that the limited partners had paid Rothenberg Ventures in advance as fees for managing its 2015 round of investments. Though the fees were earmarked for the firm, Rothenberg Ventures wasn’t to take possession of the entire amount immediately, instead receiving fees from it on a predetermined schedule, the suit says.

The firm intended to use the deposited fees as collateral for a loan, which it wanted to complete before the end of the year, according to the suit. On Dec. 23, Rothenberg instructed the bank to set up an account owned by the 2015 investment fund for that purpose, according to the lawsuit, and the bank did so on the same day. The bank, however, didn’t have enough time to complete its customary three-week internal control process before the year end, the suit says. So it took a shortcut, the suit says, creating a new account owned by the management company without telling Rothenberg.

The transfer set off a cascade of events that led to rumors of financial misconduct, an exodus of employees and the near-collapse of the firm, the lawsuit says.

“The unauthorized transfer had an inescapable and devastating effect: it created the false appearance that Mr. Rothenberg had embezzled millions in investor funds,” the suit says.

As employees left, Silicon Valley media took notice with stories appearing in TechCrunch and Wired. The firm’s eye-catching ways were now attracting attention for a different reason, and its activities and the spending that went along with them became liabilities.

Rothenberg bridled at the treatment. The Founder Field Day event didn’t cost investors money because sponsors — including big tech companies, law firms and banks — foot the bill, he said. SVB was one of those sponsors, the lawsuit says, an assertion archived websites support.

The VC acknowledges that River’s staffing and business dwindled as employees decamped for DMG Entertainment. But he said there was no financial trickery and made clear on first page of Rothenberg Ventures’ investor agreement that “the economic upside belonged to investors.”

Since the 2016 implosion, the Rothenberg Ventures payroll has dropped from 12 employees to a handful. Rothenberg has assumed many duties of those who’ve left.

Rothenberg Ventures has 175 limited partners and none of them have sued the firm, Rothenberg said. One of them, attorney Jeff Nardinelli, is part of the Quinn Emanuel Urquhart & Sullivan team representing Rothenberg in the lawsuit.

The hollowed-out venture firm couldn’t go ahead with its plans for the 2016 investments even though it had raised $20 million of a planned $50 million from investors, Rothenberg said. That took a toll on investment deals the firm already had arranged, including in video game toolmaker Unity and stock-trading service Robinhood, the suit says.

New faces coming to Rothenberg Ventures
Rothenberg said he’ll devote time to the lawsuit but others, including some new hires, will oversee the firm’s operations.

“I’m bringing on new partners and hope to announce them soon,” he said. “It’s really important for stability. Let’s let everybody take a breath, reset and bring in new faces.”